/my one cent.
.-= Ryan Martin´s last blog ..How to Develop Your Personality by Following a Hero =-.

I probably should have mentioned that I am a member of REIN, (I gave 2 of their links), but I get absolutely no financial compensation for referring them. I’ve just seen how much they’ve helped me, other family members, and tons of other people, so I like to mention them to other people that need help.

And, if Karen wants to contact me directly, feel free to send my email to her, privately of course. Have her title her email something like “Response to RE blog”, as that’s my spam-friendly email, and I wouldn’t want to mistakenly delete her email. And yes, I could easily be persuaded to guest-blog, if you actually do want one. I’ve been meaning to get into blogging myself, so this would be a good start. I am still learning about RE investing, of course, as it’s a huge field, but I’m more than happy to share what I know.

Have a good one!

However, I disagree with BB’s take on stocks being the main thing that’ll go up over time. For some reason, people are forgetting the kind of investment that the vast majority of the world’s millionaires have either made or hold their fortunes in, and it’s also the form that Karen has probably experienced some success in: real estate. Now, I’m not suggesting that Karen just go out and buy any old property, as that would be remarkably silly. I don’t know where Karen lives, so I don’t know her market. So, she needs to get educated about it, first. Most places in Canada should do ok in it now, but if she’s in BC in general, or Vancouver in particular, it will be riskier. A great tool to determine if the real estate market is overheated is called the Housing Affordability Index, put out roughly quarterly by RBC. It compares how much the average wage and the average house price. Too often, people focus on just how much the house costs, but don’t look at the income. If most people in the area make $100 000, then a $400 000 house isn’t that expensive. However, if most make $25 000, then a $400 000 house is extremely expensive. As a general rule of thumb, if the percentage is over 40%, you’re entering dangerous territory. The index can be found here http://www.rbc.com/economics/market/pdf/house.pdf

So, there are about 5 main ways that they can invest in real estate, either directly or indirectly. Indirectly, they can invest in a REIT, which is basically like a mutual fund of properties, as opposed to a mutual fund of stocks and such. I know very little about this type, so I can’t really comment on it except to say that if they go this route, they really have to due their due diligence.

The other indirect way is to invest in 2nd mortgages. With these, they should be able to get at least 8% ROI per year, and often still 10-12%. If they go this route, then the property they’re holding the mortgage on should not have a LTV (Loan to Value) ratio of higher than 90%. (Translation….someone has a property worth
$100 000, for simplicity’s sake. They have a regular first mortgage with a bank for 75%, or $75 000. Karen could register a mortgage for 15%, or $15 000 on the property, to free up some cash for the owner of the property. The owner would still have $10 000, or 10% equity in the property, as a safeguard.) In this situation, Karen is acting like a bank, and the owner would be sending her a check every month. Karen is NOT the owner of the property – she is solely a lender. Second mortgages can also be held in an RRSP, with all of those tax benefits, but most people don’t know about them as the banks want you to put your money in their mutual funds or in their GICs, and they don’t get any money if you invest in property like this. This link here http://www.misterrrsp.com/index.php?function=viewcategory&categoryid=12 is a good place to start looking into this.

If they want to actively, directly invest in RE (real estate), they could also research a town, learn how to invest, and then buy a property. This is the best informational group I know of that teaches how to do so. http://www.reincanada.com/ and http://myreinspace.com/ They also have numerous books out, the prime one being Real Estate Investing in Canada. (And the author, Don R. Campbell, is a Canadian, and invests in Canada, and gives all the proceeds of his series of books to Habitat for Humanity – he makes his money from real estate and not from selling his books.)

Fourthly, they could also JV (Joint Venture) with another, more seasoned, educated, and sophisticated real estate partner. What often happens is that one person provides the money, and the other provides the time, work, experience, etc., and handles all the headaches, as there are headaches involved with real estate investing, of course. In this situation, they would have to do a lot of due diligence on their partner, as they wouldn’t just want to give their money to just anyone. They’ll want to look at how long the person has been investing, how many properties they have, are they an expert in one particular area (or do they have 10 properties in 10 different provinces), how many JVs they’ve done, what return their JVs have made, get references from the JVs, check out the person’s credit rating, etc. (Myreinspace, above, can be a good source of partners, too.)

However, the fifth option is the one that I think they’ll like the most. It lets them get into the market, but in a safer way. It’ll also help with their kids’ education, both in school and in life lessons. And that is to buy each kid a house at their university or college. The kids will rent out their rooms, bringing in enough money to more than cover their housing costs, so they will have some other money as well to cover extra schooling costs. And, the kids will have to learn some responsibility, as well.

Now, as direct family members will be living there, they should be able to only put 5% down, and a mortgage for 95%. However, Karen probably won’t want to do that. Because of their aversion to risk, they’ll want to put a lot more down….25%, 30%, or possibly even 50%. As we all know, no market goes up in a straight line – there’s always some dips in it here and there. Having this buffer of 25 to 50% will cover that, especially as there’ll be enough money coming in from renting out rooms. That positive cashflow will enable them to ride out the rough spots. Even if the market stays completely flat for 4 years, they’ll still be making more money using this technique than they would investing in GICs, due to the constant cashflow and the mortgage paydown.

Now, depending on where the kids go to school, there’s a very good chance that the market will go up in the next 4 years. On average, over the last 40ish years, the markets have gone up about 5% a year. But let’s be conservative, and say that it only goes up 3% a year. If they put 25% down, they’re not making 3% on their money, but rather 12% , due to the power of leverage. If they want to be really conservative, and put 50% down, then they’ll be making 6%. On top of that 12%, or 6%, (depending on the amount they put down), they’ll also be making a couple percent on the monthly cashflow, and another couple percent on paying down the mortgage. So, it’s not really 12 or 6 %, but rather 15ish or 9ish%. To my mind, even the very conservative 50% down, 9ish% return is lightyears ahead of the 1% that they’re currently earning.

So, that’s what I think they should do. This last option lets them be as conservative as they want to be, while still making returns that are incredibly higher than they’re currently making. It’ll help their children go through school, and it’ll help teach their children some of what it means to be an adult while still providing them with some spending money.

However, before jumping into this, they should definitely do some research. They don’t want to lose their money because they bought the first property, stock, or GIC that they see mentioned. They should take a few months, and just educate themselves about financial matters, and see what will work best for them.

All the best!

In the near term, my guess (yes, it’s only a guess) is that deflation will be a bigger concern than inflation. I can see reasons for inflationary pressures down the road, but not now. The global debt problem makes this a deflationary environment.

There is no way that anyone can guarantee a positive return in equities over any period of time. You could have bought the Nikkei 225 index of Japanese stocks at 38 000 in 1989. Today it trades at 9500. I’ll take my chances with GICs.

Fifty years ago, you could buy a really nice home in Toronto for $27,000. Today, you can buy a decent car for the same amount. The dollar value is there, but what you can buy with it has changed dramatically.

So if you insist on storing your money in a GIC, do it with the knowledge that after tax and inflation, you are “guaranteed” to lose money. While an equity portfolio may go up and may go down month to month; in the long term it will be THE ONLY PLACE YOUR MONEY IS SAFE.

http://trade4keeps.com/2010/05/06/markets-are-selling-off-what-are-you-going-to-do/
.-= GR´s last blog ..Is it time to test the waters? =-.